Later today, the ECB will announce their latest interest rate decision where the general market consensus is that Frankfurt will keep base interest rates at 0%. Given that there is little chance of a rate hike, all eyes will be on their monetary policy statement vis-à-vis QE. Namely, the market will be paying close attention to any announcements around a possible end date to the ECBs APP and PEPP programmes, with many analysts expecting the latter to continue through to September 2022.In recent weeks the interest rate differential between the ECB and other major economies has widened, especially considering how Canada and New Zealand have raised their rates by 50bp this week and even South Korea which raised rates by 0.25%, catching the markets by surprise.
While inflation is running rife through the Eurozone there are significant disparities in CPI levels throughout different member states. For example, in Lithuania inflation stands as high as 15.7%, while close to them in Estonia and Latvia it is currently at 15.2% and 11.5%, respectively. Following the conflict in Ukraine and the geo-political aftermath, the Baltic states have been hit hard with rising energy prices from Russian exports. Hence, this has led to their inflation levels being well above the Eurozone average of 7.5%, and member states such as France (at 5.4%) whose relative lack of exposure to natural gas has reduced the impact of the rising costs of gas across the continent.
Sticking with energy, yesterday a report announced that the cost of cutting off the supply of gas to Germany from Russia would cost the EU’s largest economy €220bn, plundering Germany into a recession. The report indicated that the economy could suffer a 6.5% decline in output given that Berlin imports 49% of its Gas from Moscow. Regarding oil, Crude has fallen below $104dpb as US inventories have increased over recent days. There is also some murmurings that Chinese demand may increase into next week following an easing of Covid restrictions across Shanghai.
Canada Hike Rates by 50bpts
Yesterday morning the Bank of Canada hiked rates by 50bp bringing the base interest rate to 1%. This has made Canada the first country in the G7 to make a 0.5% rate hike in recent years with the prevailing market consensus estimating that the base interest rate could stand around 3% by this time next year. Given Canada’s red-hot housing market, the rise in interest rates will have a significant impact on consumers who will need to adjust spending habits given the rising cost of servicing their mortgages. The rise in interest rates will also have considerable impact on the cost of Ottawa severing the country’s debt, which currently stands at 117% of GDP.
The Bank of Canada also reconfirmed that they would be revising down their balance sheet through reversing their Quantitative Easing (QE) programme. Relatively speaking, the Bank of Canada’s QE programme has been one of the largest in the world, however the BoC have now stated that that they will stop re-purchasing maturing Government of Canada bonds, effectively shrinking their balance sheet over time, tightening the money supply across the economy.
All Not Fine for Boris
According to the Telegraph, Boris Johnson is set to receive a second fine after breaking the law and breaching the very covid restrictions he legislated for. The Met are currently investigating a dozen events, and it has been reported that Johnson attended six of these. This second fine is in relation to a leaving drinks party for his director of communication, Lee Cain – a long standing aide of the PM. Johnson is now also facing a parliamentary investigation from the Privileges committee into the extent to which he misled the house of commons, as it becomes increasingly apparent that he broke the Ministerial Code. Under precedent, if a member was found to be in breach of codes then the consequences include having to make an official apology, be suspended or even dismissed from the house.
Following recent developments, Nigel Mills announced that he had handed his letter of no confidence to the 1922 committee. The number of letters of no confidence needed to trigger a vote is 54, and while it is unlikely that the committee has received this number, the prospect of more fines may drive it further, especially if public support wains.
Moscow Suffers Major Blow
In Ukraine, the flagship of the Russian fleet in the Black Sea has been damaged as Russian forces appear to be mobilising around Donbas in an expected counter offensive. The Moskva cruiser has reportedly been hit by Neptune anti-ship missiles which caused its ammunition to explode following a subsequent fire. This will be a blow to Moscow given the ship’s symbolic value which has played an important role for the Russia’s in their invasion of Crimea.
Have a great day.